Founded in 1993 by brothers Tom and David Gardner, The Motley Fool helps millions of people attain financial freedom through our website, podcasts, books, newspaper column, radio show, and premium investing services.

Outback's Earnings Served Cold

The steak house has more to offer diners than investors.

Sometimes, obscure companies offering the most humdrum, uninteresting, boring products -- say, for instance, cement -- can end up being superior investments. Conversely, well-known companies with popular products don't always translate into great opportunities. I've never once had anything but a great dining experience at Outback Steakhouse(NYSE:OSI), for example, and I'm not advocating that the stock should be completely avoided -- far from it -- but it continues to flounder.

The same underlying problem that ate into the bottom line last quarter -- soaring commodity prices, particularly beef -- continues to plague Outback and rivals such as Lone Star Steakhouse(NASDAQ:STAR). For the second straight quarter, the company's cost of sales ratio rose by 40 basis points. Unfortunately, that concern has now been compounded by others. The hurricane season erased about $6 million in lost sales and another $3 million in property damage. Labor expenses are also on the rise, as costly claims forced Outback (which is self-insured) to increase health insurance reserves by $3.3 million.

Each of these factors played a prominent role in the third-quarter shortfall that was announced this morning. Earnings, which were expected to rise 8.3% to $0.52, instead plunged 23% to $0.37. Net income tumbled $9 million to $28.2 million on revenues that jumped 17.2% to $803.5 million.

Same-store sales at Outback's flagship chain managed only a slim 0.9% gain, but comps at the more upscale Fleming's Prime Steakhouse climbed 13.9%. Lone Star reported similar results earlier this month as same-store sales improvements at higher-end concepts such as Texas Land & Cattle (up 11.4%) and Del Frisco's (22.6%) far outpaced the 0.2% rise at the company's namesake units.

The Italian-themed Carrabba's Grill also registered a fractional gain in comps and has a long way to go before reaching the 40 consecutive quarters of same-store sales growth that Darden's(NYSE:DRI) Olive Garden chain has generated.

Most of Outback's third-quarter weakness can be attributed to causes that are fleeting (such as the weather), rather than more deeply ingrained operating problems. Furthermore, margins should begin to expand once food costs -- not just beef but also dairy and seafood -- begin to moderate. With as many as 150 new restaurants scheduled to open next year, adding to already-healthy top-line growth, Outback may once again be a sound investment as well as a great restaurant.

Fool contributor Nathan Slaughter wouldn't mind a Bloomin' Onion and a pint of Foster's with dinner tonight, but he owns none of the companies mentioned.